Skip to main content

Sound Advice: May 19, 2021

Sell in May and Go Away? 

Thank our British cousins for the thought that it’s best to pull up one’s investment stakes in May and come back in the fall.  It harkens back to the custom of businesspeople leaving London and going off to the countryside during the warmer summer months.  Over extended periods of years, the data supports this idea, though the results, especially most recently, have been mixed.

To get a clearer view of how this works, I tallied the results of the Dow Jones Industrial Average from May 1st to October 31st and from November 1st to April 30th for every year from 1950 to 2020.  The numbers appear to be compelling.

During the May thru October span, on average, the gains averaged a paltry 0.3%.  But if you reinvested from November thru April, the typical advance was 7.3%.  No brainer, right?

Wrong?

It turns out that the results over the latest six years didn’t follow the pattern.  In 2016, 2018, and 2020, the market’s summer months were far stronger.

If we look at the long-term results by calendar quarter, there’s a similar pattern, with a slight difference.  Prior to 2020, the strongest quarters were October to December and January to March.  On average for the latest 55 years, the market rose by an average of 6.3% during that half of the year, compared with an increase of only 1.7% in the weaker quarters.

The slight difference is attributable to last year’s first-quarter plunge and the massive second-quarter rebound, which raised the long-term average for the latter period by 0.5%, placing it in line with the first calendar quarter.  That, however, was an aberration, not a shift in seasonal patterns. 

No matter how this is seen, it is clear that the market’s seasonal strength is skewed toward the colder months.  And its seasonal weakness tends to be most pronounced in late summer, early fall.

Given that observation, it’s interesting to see what happened after substantial downturns at that time of year.  Since 1965, there have been 15 third-quarter market drops of 5.0% or more.  Those pullbacks averaged 12.2%. 

Yet in the quarters directly following, 13 out of 15 showed sizable gains, averaging 7.5%, not enough to offset the prior loss, but enough to demonstrate that strength follows weakness.

Equally clear is the reality that, over time, the path of least resistance is higher.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com


Any questions? Please contact me at nrwayne@soundasset.com

Comments

Popular posts from this blog

Sound Advice: July 8, 2020

Jobs Are Up, But So Are New Infections Through the spring months, m ost of the economic data was extremely negative, with record declines in employment and consumer spending.  The speed of that decline had no modern precedent. We are now in a recession.   The shortest recession on record occurred in 1980 and lasted just six months.  Second place goes to a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic.  The big question is: When will this recession end? Given surprisingly strong data in May, April may have been the bottom of this economic cycle.  If so, it will have been the shortest recession on record.  With massive support from the Federal Reserve, the federal government, and the reopening of previously closed businesses, employment surged unexpectedly.  At the same time, pent-up demand, stimulus checks, and generous unemployment benefits led to a reacceleration of commercial activity. Still, not all is rosy.   In his recent testimo

Sound Advice: May 13, 2020

Reality Check On the heels of the market plunge of late February and most of March, investors did a sharp about-face in April, bidding up shares at one of the fastest rates in recent history.  Although this recovery probably provided at least temporary comfort from the plunge, it would be unreasonable to view the rebound as a sign that things are all better.  They are not. For one thing, we are now in the midst of earnings reason, when companies report their quarterly results.  Some may have good news for the March quarter, but as we move through the current calendar quarter, only a few will be able to show continuing improvement.  Against the broad backdrop of U.S. business history, the months just ahead will almost certainly prove to be among the worst, from the standpoint of year-to-year comparison. With more than 30 million people filing claims for unemployment insurance, it would be difficult to expect anything other than bad economic news.  Who knows how many of these

Sound Advice: July 22, 2020

Fixed Income: In a Fix Typically, the construction of an investment portfolio has begun with an approximate balance of 60% in equities and 40% in fixed income instruments.   Fixed income generally means bonds, but that includes bond funds and exchange-traded funds holding bonds.   The equity portion is intended to be the driver of capital appreciation over extended periods of time and the fixed income portion is supposed to provide stable, albeit more moderate ongoing rates of return. The theory behind this approach is that as the time periods measured have lengthened, the relative risk of holding equities has diminished while the returns they have generated have been higher than those of other asset classes.   What equities do in the short term, even a year or two, is often anybody’s guess.    To the extent that fundamental analysis can help toward determining future equity values, investors need to look ahead three, four, five years or more before reasonably expecting t